Chapelle Appliances sells dishwashers for $ 1,200 each, which includes a 2-year warranty that requires the...

Chapelle Appliances sells dishwashers for $ 1,200 each, which includes a 2-year warranty that requires the company to perform periodic services and to replace defective parts. During 2020, Chapelle sold 600 dishwashers on account. Based on experience, the company has estimated the total 2-year warranty costs at $ 40 for parts and $ 75 for labour. (Assume sales all occur at December 31, 2020.)

In 2021, Chapelle Company incurred actual warranty costs relative to 2020 dishwasher sales of $ 4,000 for parts and $ 7,500 for labour.

Required:

Using the expense warranty approach (assurance-type warranty), prepare the entries to reflect all the above transactions for 2020 and 2021.
Assume that the company uses the ‘service-type warranty approach, and estimates that the value of the 2-year warranty for the dishwasher is $150. Record all entries for 2020 and 2021. Assume any warranty expenditures are expected to be incurred evenly over the two-year warranty period.

Solutions

Expert Solution

1. Using the expense warranty approach (assurance-type warranty), prepare the entries to reflect all the above transactions for 2020 and 2021.

Applies to a warranty that is part of the sales price.
The outstanding liability is measured at the cost of the economic resources needed to meet the obligation.
This assurance type warranty (Expense based approach) makes the assumption that along with the liability that is required to be recognised at the reporting date, the associated expense needs to be measured and matched with the revenues of the period.

2. Assume that the company uses the ‘service-type warranty approach, and estimates that the value of the 2-year warranty for the dishwasher is $150. Record all entries for 2020 and 2021. Assume any warranty expenditures are expected to be incurred evenly over the two-year warranty period.

Under the revenue appraoch for service-type warranties, the liability recognised is measured at the value of the service to be provided, not at its cost.
Recorded as separate performance obligation.

ekkarill92 answered 1 year ago

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